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Written by Andrew Button at The Motley Fool Canada
Fortis (TSX:FTS) is one of the few Canadian “Dividend King” stocks. With 50 years of dividend increases under its belt, it has one of the best dividend track records of all publicly listed Canadian companies. If you bought Fortis stock five years ago and held until today, you’d have handily outperformed the TSX Index and even the S&P 500.
The question is, can Fortis keep up its impressive results? It’s one thing to note that a stock has an illustrious history, but quite another to predict that its excellence will continue into the future. As a utility, Fortis has a lot of debt, and interest rates are currently rising. Potentially, it will encounter hardship in the years ahead. In this article, I will explore Fortis’s high dividend yield and whether investors can count on it going forward.
Why Fortis’s yield is so high
The main reason why Fortis stock has such a high yield is because the company has raised its dividend consistently over time. Despite Fortis stock rising in price over the years, its dividend has risen even more, leading to a very high yield.
What has powered all of this dividend growth?
First off, utilities, in general, can afford to pay a lot of dividends because their revenue is very stable. Regulated utilities are often very close to monopolies, and their customers have no choice but to pay. For this reason, they can count on the money coming in month after month.
Second, Fortis has invested heavily in growth. It spent the last few decades buying up utilities across Canada, the U.S., and the Caribbean. It is currently undergoing a $5 billion capital-expenditure plan that will increase its rate base (i.e., bring in new customers who will be billed by Fortis). As long as Fortis keeps up these kinds of investments and does not spend too much money on them, it should be able to keep thriving.
Can it go higher?
Having looked at Fortis’s high dividend yield, we can move on to the all-important question: “Can it go higher still?”
We know that Fortis’s dividend consistently grew in the past, but will it do so in the future?
Potentially, yes. Fortis is still growing as a company. In its most recent quarter, it delivered the following:
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$294 million in earnings, up 3.5%
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$0.61 in earnings per share (EPS), up 3.4%
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$0.62 in adjusted EPS, up 8.7%
It was a pretty good showing. Adjusted EPS grew by more than the amount by which Fortis plans to grow its dividend over the next five years (6%). Also, FTS has a relatively low payout ratio of 70%. So, it looks like the company will be able to keep raising its dividend well into the future.